The 6 Best Moving Averages for Forex Trading – Part 1

Moving Averages are the best lagging indicators in a trader’s arsenal, specially when combined with a good set of leading indicators. But what are the best moving averages among the best trading settings?In this first of two articles, we will discuss how the many types of MA’s can be optimized to solve different trading problems. We will start with the 5-T3 Adaptive Moving Average, the 14-ILRS MA and the 5-Hull Moving Average.

In the second article we will talk about the 21-EMA, the 55-EMA and the 200-EMA, going through their applications in the trading pit.

The 5 Period T3 Moving Average is by itself one of the best swing following indicators that can be used in any market and timeframe. It works by providing short term dynamic support and resistance where the price will bounce many times during the development of a trend swing.

Tim Tillson’s T3 MA is an Adaptive Moving Average that uses the difference between the current price action and the value of a same period EMA to correct its accuracy.

After the market has formed a trend, the price action will stay above or bellow the T3(5) for virtually the entire duration of each of its swings. If a candle crosses the T3(5) and then close without crossing it back, this will usually mean that the swing is over. Another full candle closing in a crossover position will confirm the swing termination.

In a Trending Market, good entries can be made based on a T3 (5) bounce happening on higher timeframes.

The 5 - T3 Moving Average Entry Strategy

Place an order in the same direction of the trend just at the time the price hits the T3(5) MA. Trail a stop loss in a lower timeframe as price bounces back in the direction of the trend. If price crosses the T3(5) and doesn’t return in the same candle, exit the trade.

This strategy works great for bounces on the H1, H4 and D1 timeframes.

After placing the order, manage the trade using the a lower timeframe (such as the M15 for an H4 entry).

Do not use this strategy in ranging markets.

14 - ILRS Moving Average – The Wicks Tracker

The smooth 14 period ILRS Moving Average likes to be away from price action just at the right distance to let wicks develop without crossing it. Because of its behaviour, this MA is great for trailing stops and even aggressive swing re-entries after a trend has developed itself.

During a trend swing, it’s not unusual to see one or two naughty candles closing with wicks exactly at the ILRS(14) MA, by the pip.

ILRS stands for Integral of Linear Regression Slope. It is one of the smoothest MA’s and carry very little market noise.

The 14 - ILRS Trailing Stop Strategy

The ILRS(14) is the best moving average to trail a stop-loss tight on a trending swing.

After the trend has formed, trail your stop-loss 1 or 2 pips away from the IRLS(14) MA candle by candle.

Leave some more space if you are trailing stops on the H1 or higher timeframes.

5 - HMA Moving Average – The Trend Watchdog

The 5 HMA, or 5 Period Hull Moving Average tracks the price very closely with some overshoot. This makes it a good MA for alerts and trend following indication.

During the formation of a trend:

The 5 HMA cross off the 5 T3 is the first alert that a swing is forming.

The 5 HMA cross off the 14 IRLS usually confirms that the new swing has been formed.

The trend swing then proceeds with the 5 HMA parallel to the 5 T3.

A 5 HMA cross back on the 5 T3 signals that the trend has lost momentum: The price may run sideways before continuing or the trend will terminate soon.

A 5 HMA cross back on the 14 IRLS usually confirms the end of the swing to a more sloppy price action.

Note: More experienced traders will want to discard discard the 5 HMA information and trade directly on price action or other leading Forex tools. Too much confirmation on lagging indicators can make you late for the best entries and exits.